Motorola shareholders sang a happy tune after the struggling cell phone maker said it had returned to profitability in the second quarter, surprising Wall Street analysts. Still, the stock is down by almost half from a year ago, and analysts say it will need an extraordinary new device, matching the popularity of the Razr, to put itself on solid footing.

Motorola reported $4 million in net income, break-even on a per-share basis, and positive guidance, leading investors to boost Motorola's share price 12.5%, or 96 cents, to close at $8.64.

Motorola's escape from the red is "a mixed bag," said mobile and wireless industry analyst Daniel Longfield, of Frost & Sullivan, who sees continued problems with the company despite sales and profits inverses that exceeded analysts' expectations.

Longfield told Forbes.com that Motorola's handset sales are running at a slower rate than other vendors--it's on pace to ship 100 million phones this year compared with 159 million last year. That is a 37.1% decline at a time when the handset market itself is growing 10.0%, he said.

Another alarming number is the average unit sales price Motorola reported of $117.00, which is lower than Nokia, the market leader. Longfield explained that Nokia has had the lower average sales price for years because it sells more units in emerging markets such as India and China, and also has nine production facilities in the Asia-Pacific region, which helps to lower costs. Motorola does not sell as much as Nokia to emerging markets and its manufacturing costs aren't as low.

Longfield added that while from a shareholder perspective Motorola had a good quarter, it is "rapidly losing market share," and is set to be "the worst performing of the top five cellphone vendors." He added that Motorola must come out with a smart phone that is popular with the public. "It needs a miracle of another Razr phone," he said, explaining that manufacturers make bigger profits from smart phones than regular cellphones. Motorola needs to "come into the new landscape of the smart phone arena" to remain profitable.

The Schaumburg, Ill.-based company said it shipped 28.1 million phones in the quarter, but has been losing market share to Finland's Nokia and South Korea's Samsung Electronics. According to research firm IDC, based in Framingham, Mass., Motorola's market share slipped slightly from 9.4% of the global market in the first quarter to 9.2% in the second, but narrowly maintained its third-place ranking, just above South Korea's LG Electronics, with 9.1%.

Motorola reported profits of $4.0 million, or 0.0 cents per share, compared with a net loss of $28.0 million, or 1 cent loss per share, in the year-earlier quarter. Revenues dropped 6.9% to $8.1 billion from $8.7 billion last year. Analysts polled by Thomson Financial had expected the company to report a net loss of $66.2 million, or 3 cents loss per share, on sales of $7.8 billion.

Motorola has said it plans to spin off its mobile device business next year. Weak financial markets and continued poor performance from the unit have kept that initiative in limbo. Analysts, including Longfield, remain skeptical that a stand-alone handset business could sustain itself.

A lack of a strong smart phone to compete against the Apple iPhone and upcoming new handsets from BlackBerry maker Research in Motion is adding to Motorola's woes. Moto's touchscreen phone called Blaze, which will be carried by Verizon Wireless later this year, could be a contender. Analysts will be looking for news on 2009 products, including faster, higher-end phones that will be built using Qualcomm and Texas Instruments chipsets.

Motorola said it expects to report earnings from continuing operations in the range of 0 cents to 2 cents per share in the third quarter of 2008 and earnings from continuing operations of 6 cents to 8 cents per share for the full year.

Source:forbes.com